A resurgence in green bond issuance may soon be at hand. While green bonds have had several years of strong growth, increasing 45% globally in 2019 to $250 billion, this year issuance has slowed down, as COVID-19 has delayed projects and pushed social bonds to the forefront.

New green bond issues have reached only slightly less than $70 billion in the first six months of this year, compared with $125 billion in the same period last year. Yet pockets of strength remain for green bonds, with EU issues growing Q/Q by 51% in the second quarter, bouncing back from a 19% year-over-year pullback in Q1, according to the Association for Financial Markets in Europe (AFME), but even that figure has been eclipsed by social, with the growth of EU social bond issuance in Q2 surging 872% to €19.1.

Now, a new report by S&P suggests that an EU-led green bond resurgence may be on the horizon. European Union leaders are currently negotiating a special Coronavirus recovery fund, which is being pitched to be as large as €750 billion. As the proposal currently stands, the EU would use bond markets to raise €500 billion for grants for member states, and another €250 billion in loans.

In earlier discussions on the funding package in May, the European Commission proposed that the funding be geared primarily to projects dealing with environmental and digital transitions. At the time, Commission President Ursula von der Leyen announced:

“The recovery plan turns the immense challenge we face into an opportunity, not only by supporting the recovery but also by investing in our future: the European Green Deal and digitalisation.”

According to the July 15 report by S&P Global Ratings, this may result in nearly a third of the package’s funding, roughly €225 billion, coming in the form of green debt, primarily through the issuance of green bonds. The report suggests:

“Given its strong commitment to finance a green recovery, and subject to concrete plans to do so, it is possible that 30% of the EU’s recovery bond issuance could be labelled “use of proceeds” green bonds, that is, where issuance proceeds are earmarked for projects that aim to make a specific environmental contribution. In this way, the EU would be able to respond to a fast-rising ESG investor base and further develop its position as an issuer in the green bond market.”

While the new package would clearly provide a significant boost to the green bond market, the proposal still faces significant hurdles. Approval of the EU recovery plan requires agreement of all 27 countries, yet the Wall Street Journal reported that some were raising objections to the plan at discussions this weekend. According to the report, one of the most controversial aspect of the plan is the proposal for the €750 billion to be raised in debt. The report indicated that some members suggested cutting the grants under the program to under €400 billion, with other proposals included making handouts contingent on the recipients governments’ agenda of economic reforms.

Highlighting the urgency of reaching a deal, von der Leyen said:

“All necessary pieces are on the table and a solution is possible. And a solution is what our people in Europe expect from us.”

von der Leyen added, “The whole world is watching us, whether Europe is able to stand up united and to overcome this corona-related crisis strongly.”